‘Clean’ CaixaBank Still Has Work to Do

By Joe Ortiz

But the product of this landmark restructuring remains a Spanish bank and there’s just a chance that capital may have to be raised in the coming years if the Spanish economy fails to return to growth.

The new bank painted a rosy picture when its parent, savings bank La Caixa, last week announced a complex plan to become a listed bank. There was much talk of segregated bad real-estate assets and ample capital. Indeed, if the Spanish economy does wake up at the same time that rates edge upward, CaixaBank will have a good shot at success. But the situation is rather more complex.

CaixaBank Structure2

The first thing to get straight is that the new CaixaBank has not shed all its exposure to Spain’s real-estate developers. Gonzalo Gortazar, the CEO of Criteria CaixaCorp, which was the listed holding company for La Caixa’s asset portfolio, has said the new bank boasts “a lack of exposure to bad real-estate assets,” and analysts echoed that view. It left behind a portfolio of bad real-estate assets, which are foreclosed or have been acquired, with a book value of €2.6 billion with La Caixa.

However, as Gortazar later made clear, the new bank will still have some €26.3 billion, or 14% of its portfolio, in loans to developers and a whopping 15% to 15.5% of these are non-performing.

As Gortazar commented to analysts, “the bank will continue to generate bad loans and there will be assets that will have to be repossessed in the future … Obviously, in this crisis, there will be bad assets that will come onto the balance sheet of the bank, there’s no question. But we’ll start with an empty bucket.”

So perhaps “clean bank” is putting it a bit strong.

Next comes capital.

The new CaixaBank boasts a Core Tier 1 capital ratio of a healthy 10.9% pro forma on a Basel II basis. That includes a €1.5 billion mandatory convertible to be issued later this year, which will convert in three €500 million tranches in 2013, 2014 and 2015.

But, asked what the core ratio would be under the new Basel III rules, Gortazar admitted that it would plummet to “over 8%.” The exact ratio will hinge on the treatment under Basel III of CaixaBank’s minority stakes in other banks and its (highly profitable) insurance business.

The core ratio of over 8% will technically comply with Basel III, but few people expect banks to travel with a core ratio much under 10%–especially institutions like CaixaBank that are likely to be deemed systemically important in their home markets. After all, it has Spain’s biggest retail market share at 20.6% and is the country’s biggest life insurer.

On the plus side, banks have until 2019 to come into line with the Basel III requirements and CaixaBank has no shortage of means to raise new capital. To start with, its free float will be just 18.5%, leaving plenty of room for new equity to be sold although this would dilute the parent, La Caixa.

Also, the bank will inherit its parent’s stakes in Telefonica S.A. and Repsol YPF, which have theoretical unrealized capital gains equivalent to about €2.0 billion, or some 130 basis points of capital. CaixaBank says it regards these stakes as a reserve of capital and as relatively capital efficient.

So, CaixaBank has a strong franchise domestically, good relationships with foreign banks such as Austria’s Erste Bank and a cleaner balance sheet than some. Given a good wind at its back and the ability to retain earnings it should be able to grow profitably.

But its fate will remain closely tied to Spain’s. Gortazar expressed the hope that 2011 will mark the bottom of the cycle for Spanish banks. In common with the others, CaixaBank needs to start seeing a gradual rise in rates and a continued easing in the war for deposits that has been raging among Spanish banks over the past year.

A lot of that is out of CaixaBank’s control, although it is to be hoped that it can continue to build on its Spanish market shares. If Spain, with its unemployment rate of over 20%, becomes a victim of sovereign jitters, all bets will be off.

This article originally appeared on Dow Jones Investment Banker. To find out more about the service please visit: www.dowjones.com/ib/

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